VAT Charged on items bought with Loyalty credit

[tonytdcom]

Hi

My customer reports that they have used the loyalty scheme for some years - customers who register are given 'points' at 5% and can redeem the points when they wish. The system credits the account of the user with the appropriate amount of cash - no problem so far - but when the customer then uses the credit to purchase items the system does not take into account that the credit is effectively a price reduction and registers the sale with VAT charged as if the customer is paying cash at the full product price. This has led to my customer over declaring VAT and paying an estimated £13K too much over the last couple of years.

1) Is there a way within the current software to resolve this issue.

2) Is there a way to report the VAT element of account sales so my customer can calculate the real VAT that should be paid.

3) If NO to the above please can you do something to provide either 1) or 2)

Many thanks

Tony

[guccij]

Is this an EPOS question?

[Mike Hughes]

No. I think your customer has got this wrong.

VAT is charged on the supply of goods. It doesn't matter if the customer paid in advance through a credit scheme or not, when the goods are supplied VAT is chargeable on them. I can't see any magical creation in this that would allow you to supply goods without charging VAT on them.

Mike

PS. My reading of the correct VAT treatment is that essentially this should be treated the same as a credit voucher. I.e. if the customer spends £100 he's really paying £95 for his items and £5 for a virtual credit voucher. The £95 should have VAT included in it but the £5 should not. VAT on the credit voucher would be accounted for on the goods purchased when the voucher is redeemed.

Your customer needs to be clear on what he's trying to achieve and check with HMRC. Actinic are unlikely to make any changes in this without a very clear case on what's needed and why.

[tonytdcom]

Mike

Thanks for the response - but I think you have hit the nail on the head:-

Customer buys goods at £100 and pays £100 - VAT is payable - no problem

The loyalty scheme gives the customer 100 points

The customer on his next visit asks to redeem his points - Epos turns his points into cash credit in the customers account so he now has £5.00 credit.
He now buys goods worth £5.00 and redeems the credit
The system does not treat this sale any different from a cash sale and adds VAT liability for the redeemed amount. It is the customers accountant who is saying that VAT should not be paid on the goods given against loyalty redemption.
As for me I am just the computer engineer with an unhappy customer who is convinced he has paid too much VAT...
My customer needs to identify the value of the goods that attracted VAT liability purchased using credit created by loyalty points - hope that clarifiys the situation.

[Mike Hughes]

I agree that it looks as if he's double paying the VAT on the redemption of points.

My main point would be to check where the Vat shouldn't be charged and then get Actinic to make the change. HMRC guidance says there are lots of variations on loyalty schemes and best to check with them to make sure the vat treatment is correct.

I'm also not an accountant, but I suspect my interpretation above is correct. i.e.

- Vat is chargeable on the supply of goods.
- No Vat is chargeable on the purchase of credit / retail vouchers.
- point schemes are usually treated as credit vouchers for Vat.*

* HMRC even make the point that they will pursue businesses if it appears they are deliberately using this as a way of avoiding Vat.

I guess you need 2 things to happen.

1. Actinic / sellerdeck need to identify the correct vat treatment for this point scheme ( for whichever product it's being used on).

2. your customer's accountant needs to identify the transactions that might have been treated incorrectly and go discuss with HMRC.

Mike

ps. re. 1. Actinic is not an accounting program. In my exprience things as complex as this are usually done as manual adjustments to the Vat account.